A Merger Unlikely, What's Next for EchoStar?

By ANDREW ROSS SORKIN and SETH SCHIESEL

Published: October 11, 2002

So what is Charles W. Ergen's Plan B? If Mr. Ergen, the chairman of EchoStar Communications, is unable to persuade the Federal Communications Commission to reverse its rejection of his company's proposed acquisition of Hughes Electronics, he readily acknowledges that he has no backup plan.

''I haven't given that thought,'' Mr. Ergen said on Wednesday at an industry conference in Midtown Manhattan. For a moment he allowed himself to think about it, acknowledging that if the deal failed, his company would ''go over a cliff.'' Then he resumed his pep talk: ''I'm playing to win. I don't spend a lot of time thinking about losing.''

The only chance that EchoStar, Hughes and General Motors, which owns Hughes, have of rescuing the proposed merger from almost certain defeat is to significantly change the terms of the deal -- and those chances are diminishing, too.

A possible rescuer may be in Bethpage, N.Y., home of Cablevision Systems, the nation's No. 7 cable television company. In August, Cablevision proposed to the F.C.C. that it require EchoStar to give 17 of its satellite frequencies to Cablevision so that it could start a rival direct-broadcast satellite operation.

But an F.C.C. commissioner expressed skepticism yesterday that even a deal like the one Cablevision is proposing would be enough to clear the merger. ''Expecting a new, unformed entity to come in and compete successfully with a merged EchoStar and DirecTV is to dream the impossible dream, especially in light of the capital starvation that continues to stalk this sector,'' the commissioner, Michael J. Copps, said in a statement. ''Were this merger to proceed as presented, the likelihood of another satellite provider entering the market in the near future -- and being able to compete effectively with the huge merged entity applicants seek to create -- would be so tiny as to be almost invisible.''

But another commissioner, Kevin J. Martin, suggested that such a development could have a chance of approval. ''This idea is interesting, but the applicants have made no such proposal,'' Mr. Martin said. ''If the applicants were to request such a structural remedy, it could merit further review as to its technical and economic feasibility. Failing to fully explore such options could be a missed opportunity to bring more competitive choices to consumers.''

For months, Mr. Ergen rejected any notion of giving up frequencies, saying that a combined EchoStar-DirecTV would need all of the two companies' satellite assets to deliver its full menu of planned services, including high-speed Internet access.

By striking a deal with Cablevision, Mr. Ergen could argue that consumers in most of the nation would still have access to three different providers of pay television services -- the local cable company, the combined EchoStar-DirecTV and the new Cablevision service. Charles F. Dolan, Cablevision's chairman, knows that and is ready to capitalize.

Most American homes now have three choices for pay television service: EchoStar's Dish Network, Hughes's DirecTV and the local cable company. The main objection to a merger of DirecTV and EchoStar is that the deal would reduce those choices to two. For homes in rural areas without cable access, the number of choices would fall to one.

But adding another choice could be prohibitively expensive. Cablevision's plans to build a satellite television operation from scratch face widespread skepticism in the communications and media industries because of the financing difficulties. Cablevision recently announced that it would sell its chain of movie theaters and close many of its Wiz electronics stores to bridge a cash deficit of perhaps $600 million that was looming for next year.

To allay the financial concerns, Cablevision, which says it intends to get into the satellite business with or without the EchoStar frequencies, is seeking potential partners who can contribute cash to its venture.

One of the companies that Cablevision approached, and which rejected the concept, was the News Corporation, controlled by Rupert Murdoch. The News Corporation lost to EchoStar last year in the bidding for Hughes. Now that EchoStar's deal is in extreme jeopardy, Mr. Murdoch is eagerly awaiting an opportunity to make another offer for Hughes, according to people close to him. John C. Malone's Liberty Media will probably contribute cash in support of Mr. Murdoch's bid in return for an equity stake in the new venture.

Mr. Murdoch wants to add DirecTV to his global satellite empire, which includes B Sky B in Britain and the Star operations in Asia.

While it is clear that Mr. Murdoch would like to make another attempt to acquire Hughes and DirecTV, he does not need to make any overt moves in coming weeks. He will probably begin to quietly approach bankers to line up any required outside financing, people close to the News Corporation said yesterday, but in general time is on his side.

An acquisition of DirecTV by the News Corporation would face a much less difficult regulatory review than the EchoStar deal, because the News Corporation is not already in the satellite business in the United States. After all the regulatory and antitrust difficulties of the last year, G.M. could welcome such a relatively straightforward deal.

Under their agreement, though, G.M. and Hughes are obligated to fight alongside EchoStar to try to preserve their deal, at least until Jan. 21. On that date, Hughes can call off the deal if it has not received all the required regulatory approvals and force EchoStar to pay a $600 million termination fee.

Until the EchoStar merger agreement is legally terminated, G.M. cannot entertain any competing offers without jeopardizing the $600 million fee from EchoStar. Were G.M. to enter any discussions with the News Corporation before the merger agreement were legally terminated, EchoStar would probably be able to avoid paying the fee.